The only reason they had to disclose these talks at this point is because Real also filed for a new tender offer to issue new stock, which has very strict disclosure policies, he said, and that’s why the filing about the JV reorg. This comes as Rhapsody has done small cuts in multiple rounds through the last year, including laying off 12 people earlier in late summer.

Update: The new tender offer is to allow employees to exchange underwater options for fewer options at a new strike price.

The full filing text: RealNetworks, Inc. (“RealNetworks”) is currently in discussions with MTV Networks, a division of Viacom International Inc. (“MTVN”), relating to the possible strategic reorganization of its jointly owned and operated business-to-consumer digital audio music service, Rhapsody America LLC (“Rhapsody”). These negotiations are focused on a potential restructuring of RealNetworks’ and MTVN’s relative economic rights in the joint venture and on their relative abilities to exercise control over decision-making to enable Rhapsody to operate more independently of either party. If these discussions result in a definitive agreement, RealNetworks may agree, among other things, to adjust the corporate governance and/or management structure of Rhapsody and to reallocate the ownership of Rhapsody between RealNetworks and MTVN such that RealNetworks’ percentage ownership of Rhapsody could be reduced from 51% resulting in both parties owning 50% or slightly less. These discussions are currently in the preliminary stages, and RealNetworks cannot predict whether they will result in a definitive agreement or, if a definitive agreement is reached, the final terms and conditions of any such agreement, or the impact of a restructuring on RealNetworks’ financial statements or results of operations.

The full details of the JV contract on Rhapsody America, started in Aug 2007 after MTV ditched its own Urge service: From the latest RNWK 10Q:

Formation
    On August 20, 2007, RealNetworks and MTVN created Rhapsody America to jointly own and operate a business-to-consumer digital audio music service. Under the Rhapsody America venture agreements:

• RealNetworks contributed its Rhapsody service subscribers, RadioPass subscribers, cash, contracts, revenue from existing Rhapsody subscribers, marketing materials, player hardware, rhapsody.com and related URLs, certain liabilities, and distribution arrangements in exchange for a 51% equity interest in Rhapsody America. RealNetworks also licensed certain assets to Rhapsody America, including Rhapsody content, Rhapsody technology, the Rhapsody brands and related materials.

• MTVN contributed its URGE service subscribers, cash, contracts, marketing materials, and revenue from existing URGE subscribers, certain liabilities, plus the note payable described below, in exchange for a 49% equity interest in Rhapsody America. MTVN has also licensed certain assets to Rhapsody America, including URGE content, brands and related materials.

• In addition to the assets described above, MTVN also contributed a $230 million five-year note payable in consideration for acquiring MTVN’s interest in the venture. In February 2009, RealNetworks and MTVN signed an amendment to the Rhapsody America venture agreement to true-up the original fair values contributed to the venture. The amendment reduced the MTVN note payable from $230.0 million to $213.8 million over the same five-year term. Rhapsody America must use the proceeds from the note solely to purchase advertising from MTVN. As MTVN makes payments on the note, Rhapsody America records equity and RealNetworks realizes an immediate appreciation in the carrying value of the Company’s interests in the venture.

MTVN made payments of $17.0 million and $31.4 million during the quarter and nine months ended September 30, 2008, respectively. As a result, RealNetworks realized and recorded gains in the condensed consolidated statements of operations for the quarter and nine months ended September 30, 2008 of $8.7 million and $16.0 million, respectively, as all of the gain criteria were met. During the quarter and nine months ended September 30, 2009, MTVN made payments of $7.4 million and $21.9 million, respectively, for which the sale of ownership interests in Rhapsody America have been reflected as an equity transaction and $3.8 million and $11.2 million, respectively, have been recorded directly to shareholders’ equity. As of September 30, 2009, $91.3 million in payments have been made on the note since the formation of Rhapsody America.

Call/Put Rights
    Pursuant to the terms of the Rhapsody America limited liability company agreement, RealNetworks has the right to purchase from MTVN, and MTVN has a right to require RealNetworks to purchase, MTVN’s interest in Rhapsody America. The Company has evaluated the terms of the call and put rights under applicable accounting literature, and concluded that neither of these rights represent freestanding financial instruments or derivatives that should be accounted for separately.

    These call and put rights are exercisable upon the occurrence of certain events any time after January 1, 2011 and during certain periods in each of 2012, 2013 and 2014 and every two years thereafter, and are not exercisable any time prior to January 1, 2011. If MTVN exercises its put right, RealNetworks has the right to pay a portion of the purchase price for MTVN’s interest in cash and shares of RealNetworks capital stock, subject to certain maximum amounts, with the balance (if any) to be paid with a note. If RealNetworks exercises its call right, MTVN has the right to demand payment of part of the purchase price for its membership interest in shares of RealNetworks’ capital stock. If a portion of the purchase price for MTVN’s interest is payable in shares of RealNetworks’ capital stock, such shares could consist of RealNetworks’ common stock representing up to 15% of the outstanding shares of RealNetworks’ common stock immediately prior to the transaction, and shares of our non-voting stock representing up to an additional 4.9% of the outstanding shares of RealNetworks’ common stock immediately prior to the transaction, representing a maximum total of 19.9% of RealNetworks’ capital stock. If RealNetworks pays a portion of the purchase price for MTVN’s membership interest in shares of RealNetworks’ common stock and non-voting stock, RealNetworks other shareholders’ voting and economic interests in RealNetworks could be diluted, and MTVN will become one of RealNetworks’ significant shareholders.

    The redemption prices of MTVN’s interest in Rhapsody America under both the call and put rights are calculated based on the provisions within the limited liability agreement, as amended, are impacted by the total appraised value of Rhapsody America and assume repayment of the $213.8 million five-year note payable from MTVN. Once the call right becomes exercisable, the redemption price of MTVN’s interest in Rhapsody America under the call right will be equal to the greater of $213.8 million or the appraised value of MTVN’s interest in Rhapsody America at the redemption date.

    Once the put right becomes exercisable, the redemption price of MTVN’s interest in Rhapsody America under the put right will be based on a formula that is dependent on the appraised value of Rhapsody America. If the appraised value of Rhapsody America at that time is equal to or greater than $436.3 million, the implied fair value of the venture at its inception, then the exercise price of the put is equal to the appraised value. If the appraised value of Rhapsody America at the redemption date is less than $436.3 million, then the exercise price of the put includes a preferred return due to MTVN.

    For the period from August 20, 2007 (inception of the venture) through September 30, 2008, the Company determined that the value of the Rhapsody America venture had not declined from its initial implied fair value and assessed the probability that the put would include a preferred return as remote. The formula that determined that put redemption amount was considered to approximate fair value for this period. However, beginning with the fourth quarter of 2008, the current appraised value of Rhapsody America was determined to have declined to the point where the Company has determined that the likelihood of the put triggering the preferred return when exercisable was no longer remote and considered the put formula to no longer approximate fair value. Beginning with the fourth quarter of 2008, the Company has accounted for the noncontrolling interest as having a fixed price redemption feature.

    The hypothetical current redemption price of MTVN’s interest in Rhapsody America under the put right at September 30, 2009, before consideration of the remaining payments due on the note, was approximately $27.1 million. The current redemption price has been adjusted under the formula in the limited liability agreement for the remaining outstanding amounts due of $122.5 million on the note payable as of September 30, 2009. The Company has elected to accrete any excess of the redemption value over the carrying amount as an adjustment to income attributable to common shareholders and has adjusted earnings per share for the current quarter’s accretion of the difference between accretion as calculated using the terms of the redemption feature and the accretion entry for a hypothetical fair value redemption feature. For the quarter and nine months ended September 30, 2009, the Company increased the noncontrolling interest on the Condensed Consolidated Balance Sheets by $3.9 million and $5.8 million, respectively, of which, $0.9 million and $2.8 million was an adjustment to income attributable to common shareholders for the purposes of calculating earnings per share during the quarter and nine months ended September 30, 2009, respectively. See Note 13, Earnings Per Share, for more information on this item. For 2008, this amount was nominal to the condensed consolidated financial statements.